NCLAT Rules Promoters Not Liable Under Section 65 IBC Without Direct Role in Fraudulent Initiation of CIRP

The NCLAT ruled that promoters cannot be held liable under Section 65 of the IBC unless they had a direct role in the fraudulent initiation of the Corporate Insolvency Resolution Process (CIRP).

The National Company Law Appellate Tribunal (NCLAT), Principal Bench comprising Justice Ashok Bhushan (Chairperson) and Technical Members Mr. Barun Mitra and Mr. Arun Baroka, reviewed two connected appeals along with related interlocutory applications and held that a penalty under Section 65 of the Insolvency and Bankruptcy Code (IBC) can be imposed only on the person who fraudulently or maliciously initiates insolvency proceedings. The Tribunal emphasised that the provision must be strictly construed and does not extend to promoters or third parties, as it does not admit vicarious liability. It further clarified that the issuance of a Show Cause Notice by the Adjudicating Authority is within its jurisdiction and does not require reliance on Rule 59 of the NCLT Rules.

Two appeals were preferred before the NCLAT against a common order dated 12.06.2024 passed by the Adjudicating Authority (NCLT, New Delhi Bench, Court-II) in CP (IB) No. 50(PB)/2021. The impugned order had allowed IA No. 3602 of 2022 filed under Section 65 of the Insolvency and Bankruptcy Code, 2016 (IBC), recalling the earlier admission order dated 17.05.2022 passed under Section 7 of the IBC. A Show Cause Notice was also issued to the financial creditors calling upon them to explain why a penalty under Section 65(1) should not be imposed for fraudulent initiation of the Corporate Insolvency Resolution Process (CIRP).

Company Appeal (AT)(Ins.) No. 1608 of 2024 was filed by Rockman Advertising and Marketing (India) Ltd., a shareholder of the corporate debtor, while Company Appeal (AT)(Ins.) No. 1606 of 2024 was filed by individuals who had intervened in the Section 65 application proceedings. Both appellants challenged the non-imposition of a penalty under Section 65 despite a conclusive finding by the Adjudicating Authority that the CIRP had been initiated fraudulently. The Section 7 application had been filed by Respondents Nos. 1 to 6, and based on allegations of collusion with the promoters, Rockman Advertising had sought recall of the admission order, which the Adjudicating Authority ultimately accepted, directing restoration of control to the corporate debtor's former management.

The appellants contended that while the order recognised malicious intent on the part of the financial creditors, the failure to impose a penalty was unjustified. They further argued that the scope of Section 65 should extend to those who conspired in the fraudulent initiation, including promoters, and sought maximum penalties and exemplary costs against both financial creditors and promoters. However, the promoters refuted these allegations and asserted that the statute did not envisage penal action against non-applicants to the CIRP.

The NCLAT, after considering the statutory framework and precedents on strict interpretation of penal provisions, held that Section 65 was applicable only to those who had actually initiated the insolvency resolution process—namely, financial creditors, operational creditors, or corporate applicants. The Tribunal found no statutory basis to extend penal liability to promoters in the absence of specific language creating such liability. Citing established principles, it reiterated that penal provisions must be strictly construed and cannot be expanded by implication or inference.

It was also clarified that Rule 59 of the NCLT Rules, 2016—which governs the imposition of penalties under the Companies Act, 2013—had no application to proceedings under the IBC. Despite the appellants’ objection to the procedure adopted by the Adjudicating Authority in issuing Show Cause Notices, the NCLAT held that there was no statutory prohibition against such issuance under the IBC. Nevertheless, the Tribunal declined to itself impose penalties, stating that the discretion to do so rested solely with the Adjudicating Authority based on its findings and future proceedings.

Accordingly, the NCLAT dismissed both appeals, concluding that while the Adjudicating Authority had rightly recalled the admission order due to fraudulent initiation of CIRP, the question of penalty remained open and subject to further adjudication by the said Authority in accordance with law.

Mr. Rohit Gandhi, Ms. Akshita Nigam, Mr. Sakal Bhushan, Ms. Vasu Bhushan and Mr. Nipun Bhushan, Advocates, represented the Appellants.

Ms. Eshna Kumar and Mr. Harpreet Singh Malhotra, Advocates, appeared for Respondent No. 8 to Respondent No. 15.

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